What are my payment options when buying a used car?

Coins in a jam jar With Labelled Attached

When it comes to purchasing a used car, there are various financing options available to suit drivers in different situations. Whether you’ve been preparing to buy your next vehicle for a while and are in a good financial position, or your old motor has suffered an unexpected breakdown and you’re struggling to raise a lump sum to buy outright, car finance choices exist for those in both positions.

Depending on a variety of factors, any one of the following methods could be suitable when buying a used car. Consider the advantages and disadvantages of each one and how they apply to your situation to discover the best way to buy your next vehicle.

Cash and savings

The best way to afford a used car, without paying more over time due to interest involved in borrowing, is to purchase it outright. For those who have been preparing to buy a new vehicle or have recently sold an old one, this should be achievable with cash and savings.

It is advisable to ensure you still have savings left in case of an emergency. If not, then it can be a good idea to only fund part of your purchase through cash and savings. Where possible it can be worth considering payment via credit card, as you benefit from credit card purchase protection should anything go wrong.

Secured and personal loans

With a good credit rating you will be able to take out a secured or unsecured car loan from most major banks, building societies or finance providers such as the AA to cover the costs. Homeowners have access to secured loans, whereby the amount borrowed is secured against your home, meaning a higher amount can be lent.

While others can make the most of unsecured (or personal) loans, where you do not need to own a home. This does mean that less can be borrowed, but it should be more than enough to cover the costs of a used car, unless you’re after a Lamborghini Aventador.

Hire purchase

Hire purchase is one of the most popular car finance methods used to buy a new or used vehicle. This works with the buyer paying off the cost of the car in monthly instalments for a period of 12 to 60 months. Usually a 10% deposit has to be put down as well, so you will need to afford this.

The hire purchase loan is secured against the value of the car, so you don’t officially own it until the last payment has been made. Therefore, you cannot change cars until it is all paid off. On the plus side, this is relatively straightforward payment method to arrange.

Personal Contract Purchase (PCP)

Similar to hire purchase, the main difference is that the monthly instalments are to pay off the depreciation of the car rather than its full value. At the beginning of a personal contract purchase agreement, a guaranteed future value is estimated, of how much the car will be worth when the contract ends.

This means the money you’re borrowing and repaying is the difference between what the car is worth at the start and end of the contract, with this difference paid off in monthly instalments. Then at the end of the contract you have a choice between paying a final balloon payment to own the vehicle, handing the car back or part-exchanging it for a new vehicle. Personal contract purchase does require an estimated mileage to be provided too.

Personal Contract Hire (PCH)

For those not interested in owning a car, personal contract hire is a good option. It is a form of long-term rental where you lease a car for an agreed period of time, paying monthly instalments. However, unlike hire purchase or personal contract purchase, when the contract ends you either return the car or take out a fresh contract on another car.

As you will not own the vehicle at the end, monthly payments are lower, although if you decide you do want to buy, there is no such option. An estimated mileage has to be provided again, and exceeding this can incur significant extra costs.

There are numerous options available when it comes to funding your next car. Speak to family and friends about their experiences and ensure the choice you make is the best option for you over the most suitable time period.

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